The International Swaps and Derivatives Association (ISDA), the Futures Industry Association (FIA) and the Securities Industry and Financial Markets Association (SIFMA) published a discussion paper on cross-margining arrangements developed by qualifying central counterparties (QCCPs) and described forms of cross-product netting agreements that banking organizations may enter into with customers, including in the context of implementing market reforms with respect to US Treasury securities clearing.
Those market reforms include the anticipated expansion of QCCP cross-margining arrangements for US Treasury securities, US Treasury repurchase (repo) transactions and US Treasury futures in light of the clearing mandate issued by the US Securities and Exchange Commission (SEC).
The paper adds to previous presentations to US authorities proposing potential changes to the US regulatory capital rules to more appropriately reflect banking organization cross-product netting agreements with customers, in particular through (i) treating repo transactions as forward-settling interest rate derivatives and (ii) determining the exposure at default (EAD) of a portfolio of repos and derivative contracts subject to a cross-product netting agreement under the standardized approach for counterparty credit risk (SA-CCR).
This discussion paper broadly addresses the current treatment under the US regulatory capital rules of banking organization contributions to a QCCP default fund and proposes potential targeted changes to the US regulatory capital rules applicable to default fund contributions to more appropriately reflect the economics and risk offsets of QCCP cross-margining arrangements.
The Associations describe a preferred approach and an alternative approach to revise the US regulatory capital treatment for default fund contributions that reflect QCCP cross-margining arrangements, including in respect of the combined portfolio of products subject to a qualifying cross-margining arrangement (i.e., derivatives and repos).